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    Apr. 3, 2025

GP Clawbacks and Related Risk Mitigation Tactics LPs Pursue to Prevent Overpayment of Carried Interest (Part One of Two)

Clawback provisions – which allow LPs to recoup excessive carried interest distributions from GPs – are increasingly becoming a central focus in GP‑LP negotiations. The importance is highlighted by Upwelling Capital Group’s study which found that approximately one in 14 U.S.‑based PE firms is at risk of a clawback. As a result, LPs are taking a more proactive approach to negotiating GP clawbacks and ancillary protections. Although some sponsors are not giving ground, others have been forced to acquiesce by granting LP-favorable terms (e.g., interim clawbacks) due to the current difficult fundraising environment. This two-part article series provides context for the increased focus on clawback provisions in GP‑LP negotiations, as well as additional risk mitigation techniques pursued by both parties. This first article provides an overview of the current industry focus on clawback provisions, along with descriptions of additional protections LPs pursue to ensure they receive their share of fund profits. The second article will highlight contractual mechanisms that GPs employ to limit the scope and likelihood of clawbacks, as well as to improve their ability to hold current and former employees accountable for their respective pro rata shares of clawback obligations. See “How Key PE Fund Terms Are Being Shaped by Current Fundraising Challenges, Liquidity Needs and Distinct Shifts in the Market” (Feb. 9, 2023).

SBAI Introduces New Standards and Accompanying Guidance on Valuing Illiquid Assets

The Standards Board for Alternative Investments (SBAI) has published two documents that outline ongoing concerns about valuation methodologies and offer ideas and proposals for improving industry practices. The first document is a consultation paper (Consultation Paper) that proposes updates to the SBAI’s Alternative Investments Standards (Standards), which offer a framework for assessing the quality of fund managers’ valuation processes as to illiquid assets. Concurrent with releasing the Consultation Paper, the SBAI issued guidance (Guidance) suggesting alternative methodologies to value illiquid assets; tips when using independent valuation agents; and considerations when using valuations in liquidity management tools (e.g., GP‑led secondaries). This article briefly summarizes the Standards, the revisions proposed in the Consultation Paper and key points raised in the Guidance, along with insights and commentary from PE industry experts. For other SBAI guidance, see our two-part series on avoiding parallel fund conflicts: “New SBAI Standards and Case Study Provide Guidance for Mitigating Conflicts” (May 5, 2020); and “Specific PE, Real Estate and Private Credit Issues and Mitigation Tips” (May 12, 2020).

Trends in IRS Audit Efforts and Tips on Surviving an IRS Examination

The whirlwind of the second Trump administration has not left the IRS unscathed. Trump broke with precedent by promising to fire the tax-collecting agency’s commissioner, leading him to resign. Plans to add a further 10,000 employees are on hold following Trump’s executive order freezing federal hiring, which follows his statement about intending to fire or reassign 90,000 recently hired IRS staffers. The IRS has not yet, however, felt the force of those proposed changes. In fact, there are indications the upheaval at the IRS may be more limited than elsewhere. One reason is that Trump is hunting for revenue to pay to extend and expand the Tax Cuts and Jobs Act of 2017. Although the president hopes tariffs will cover those costs, he has also indicated a desire to close the “carried interest” loophole. Those efforts could be a sign that certain recent IRS audit and enforcement activities targeting fund managers and their personnel could survive the current deregulatory environment. Those trends were discussed by a panel at the Private Investment Fund Tax & Accounting Forum featuring Kostelanetz LLP partners Caroline D. Ciraolo and Melissa Wiley, as well as Eisner Advisory Group partner Miri Forster. This article summarizes the panel’s insights on which entities are receiving increased audit attention; the types of claims facing more IRS scrutiny; and how to effectively navigate the audit and enforcement process. See our two part series “Hot Topics in Tax and Negotiating Tips for Private Fund LPs”: Part One (Aug. 10, 2023); and Part Two (Aug. 24, 2023).

Current Landscape and Trends in Fund Financing Terms and the Rise of Non‑Bank Lenders

Fund financing continues to grow despite various headwinds in recent years. To help industry participants understand the current landscape and recent trends, Haynes Boone recently published a report (Report) detailing trends in different terms, structures and considerations in the fund financing industry, as well as the rapid rise of non-bank lenders as a source of financing for subscription facilities and, more prominently, net asset value facilities. The Report draws on internal data from hundreds of fund finance facilities the firm has worked on; survey results from the attendees of NAVember in November 2024; and the results of an industry-wide survey administered by Haynes Boone in January 2025, which received more than 170 responses from over 100 different sponsors, lenders and service providers. This article summarizes key takeaways from the Report, as well as additional market insights from the co-authors of the Report, Haynes Boone partners Aleksandra Kopec and Brent Schultz. For additional insights from Haynes Boone, see “Structuring Margin Loans for PE Funds and Addressing Key Facility Terms With Lenders” (Nov. 1, 2022); and “Alternative Financing Facilities: Streamlined Borrowings and Longer Loan Durations With Hybrid Facilities” (Mar. 3, 2020).

Ireland’s New Dividend Participation Exemption: An Opportunity for Asset Managers

Industry bodies across various sectors have, for many years, articulated a need for Ireland to introduce a form of dividend participation exemption into its tax code to sit alongside the existing capital gains participation exemption. The introduction of such an exemption represents a culmination of this ongoing dialogue and consultation between stakeholders and Ireland’s Department of Finance. This measure aims to enhance Ireland’s holding company regime by exempting qualifying foreign dividends from Irish corporation tax in the hands of the Irish recipient company. The addition of a dividend participation exemption to Ireland’s tax code is an important development, further enhancing Ireland’s position as a leading jurisdiction for private market investment structures. Although the scope of this exemption is presently limited to E.U./European Economic Area countries and treaty jurisdictions, it marks a significant advancement in addressing complex double-taxation issues and simplifying compliance for cross-border operations. This guest article by Shane Geraghty, partner at K&L Gates in Dublin, and Patrick McClafferty, partner, and Elaine Butler, senior manager, at Nexus Taxation explains how the dividend participation exemption operates; its practical implications and benefits; the eligibility requirements; the implementation and compliance considerations; and the strategic implications for asset managers. See the two-part series “Holistic Evaluation of Innovations Intended to Propel the Irish Private Funds Framework”: Part One (Jul. 12, 2022); and Part Two (Jul. 19, 2022).

Cadwalader Adds Fund Finance Team in London

Cadwalader has announced that Bronwen Jones, Douglas Murning and Matthew Worth have joined as partners in the firm’s fund finance practice in London. The trio enhances the leveraged finance, private credit, special situations and restructuring capabilities of the firm’s U.K. team. For insights from Cadwalader, see “The State of NAV Loan Facilities in the PE Industry and Current Obstacles to Widespread Adoption” (Feb. 9, 2023); and “U.K. Long‑Term Asset Fund: Where It Fits Among U.K. Fund Regimes and How Managers Can Launch One (Part One of Two)” (Feb. 15, 2022).

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